I l-o-v-e making money. You too?
But I’m quite certain money is just the outcome… of a very well-designed, intentional game.
It’s an exciting insight, I admit.
Knowing – no kidding, that the outcome… is not… the game.
You get that, right?
It took me a few life lessons to learn, to keep those two sides of the equation, un-confused.
Said another way (and perhaps especially, for Zen fans): the game is the game; and, the outcome is the outcome.
So, in terms of investing, and specifically, investing in REITs (real estate investment trusts) … about which I have over three decades of real world, on the ground experience… money is the outcome of a collection of sensible, thoughtful, measured risks. (The “game.”)
Today, I want to steel myself, and take a further step with you.
Out to the land of 8% dividends plus.
At this point, there’s less oxygen, but you can still breathe. The risks are now, “calculated.” And the path a bit narrower, requiring even better balance. Yes, it can be done. No, it’s not for the squeamish, or faint of heart. And, as guide, I must remind you: We are not talking about those sucker yields, or value traps, those beyond-reach, enticing, sometimes even double-digit yields that trot their way ‘cross the stage with great fanfare – yet don’t, or cannot, survive sunset.
Crucial to note: I am a committed, value investor. I look for strong companies, at very fair prices, with wide moats, excellent business plans, increasing earnings, super-strong balance sheets, steady, growing dividends, stellar managements, and all the metrics heading in their right directions.
That’s the game. Let’s see the “boom!” outcomes.
Here’s a set of some “great 8’s. ” Of course, do your own due diligence, and don’t just buy mine.
Of these five picks, three are commercial mortgage lenders (or CmREITs – which are different than eREITs, or equity REITS, which round out our picks); one’s an office REIT and one’s a hotel company.
Strap in. Let’s rocket!
Granite Point Mortgage (GPMT) was formed in 2017 to continue and expand the commercial real estate lending business established by Two Harbors Investment Corp. The company is externally managed by Pine River Capital, and focuses on originating, investing in, and managing senior floating-rate commercial mortgage loans, as well as other commercial real estate debt investments. Granite Point focuses on primary and secondary markets – targeting the top 25 (and generally up to the top 50) MSAs, searching for value nationwide. The commercial mREIT actively participates in the top five markets, which are large and liquid. The company has a diversified capital structure and an attractive mix of available funding alternatives. At the end of 2018, the company owned a portfolio with a principal balance of $3.2 billion, which was over 98% floating rate, and over 97% senior commercial mortgage loans, with a weighted average stabilized LTV of 63%. We maintain a BUY. The company raised its dividend twice in 2018, and yields 8.84%.
KKR Real Estate (KREF) completed its IPO in May 2017, focuses almost exclusively on senior-secured loans and has deployed capital prudently with a focus on quality sponsors, liquid real estate markets, and prudent business plans. KREF is externally managed by a subsidiary of KKR, a leading global investment firm with an over 40-year history and diverse mix of investments across multiple asset classes, including private equity, real estate, energy, growth equity, infrastructure, credit and hedge funds (through strategic manager partnerships). As of December 31, KREF’s portfolio of $4.1 billion was 100% performing, and 98% floating-rate, with a weighted average LTV of 68%. The portfolio increased 98% over 2017, had no impairments, and lacked any legacy assets prior to October 2014; all investments are located in the United States. The company continues to scale their portfolio, and expects originations will be heavily weighted toward floating-rate loans. We maintain a BUY. The dividend increased last summer, and yields 8.5%.
TPG Real Estate (TRTX) is one of the five components of my new commercial mortgage REIT index, known by the acronym, BLAST. TRTX is the “T.” BLAST is designed to give investors a comparison tool, a benchmark, to test their investment and dividend returns against. TRTX is externally-managed by TPG RE Finance Trust Management, L.P., an affiliate of TPG, a leading global alternative investment firm founded in 1992 with over $103 billion of assets under management as of December 31, 2018. TRTX directly originates, acquires and manages commercial mortgage loans and other commercial real estate-related investments in North America. Their focus is primarily floating rate first mortgage loans secured by high quality commercial real estate properties undergoing some form of transition and value creation, such as re-tenanting, refurbishment, or other form of repositioning. Properties are in primary and select secondary U.S. markets with attractive economic conditions and commercial real estate fundamentals. Q4-18 and full-year results come out later today, but as of Q3-18, their portfolio consisted of 62 first mortgage loans (or interests) with a principal balance of $4.2 billion, weighted average credit spread of 4.2%, and weighted average LTV of 63.4%. We maintain a BUY. The company’s dividend payment increased twice last year, and yields 8.6%.
City Office (CIO) is a small-cap office REIT that focuses on secondary markets that remain supply constrained. As of Q3-18, the company had grown its property portfolio to 62 office buildings in seven cities with approximately 5.3 million square feet of net rentable area, with an occupancy rate of 90.1%. (Q4-18 and full-year earnings are coming out mid-week.) Like many small-cap REITs, City Office IPO’d in 2014 with a dividend in excess of its AFFO/share, in order to attract investor interest (the Q3-18 payout ratio was 118%). This year City Office is expected to fully cover its dividend with cash flow, and begin growing the dividend in line with AFFO/share growth in 2021. Over time, the REIT’s ability to maintain its industry-leading growth rate should be enhanced. Analysts expect 2019’s 9% growth rate will be maintained over the next decade. And while we also recognize this as a more speculative REIT, we’ve assigned a “STRONG BUY” recommendation. CIO’s dividend yields 7.8% (as of Friday’s close).
Park Hotels & Resorts Inc. (PK) is a Lodging REIT, with a diverse portfolio of iconic, market-leading hotels and resorts with significant underlying real estate value. Park has ownership or leasehold interests in 54 properties with over 32,000 rooms; 87% are luxury and upper upscale; over 97% are located in the U.S. PK’s holdings are in major urban and convention areas such as New York City, Washington, D.C., Chicago, San Francisco, and New Orleans; premier resorts are in key leisure destinations, including Hawaii, Orlando, and Key West; other hotels are adjacent to major gateway airports, such as LAX (Los Angeles), Boston’s Logan, and Miami International. Q4-18 & full-year earnings will be released at mid-week; Q3-18 results included 2.6% RevPAR increases from the comparable period the prior year, and 5.7% increase in AFFO for nine months ending September 30, from the prior year’s same period. We’re underweighting the Lodging sector in 2019, as a cautionary measure, should recession clouds start to gather. Still, we consider this stock a STRONG BUY, and enjoy its list-leading dividend yield of 8.87%.
Find other high-yielding REIT choices – and lower-yielding ones, plus learn more about our commercial mortgage REIT index, BLAST… with my monthly Forbes Real Estate Investor. The new March issue is just days away. By subscription only, and quite worth it. We dig REITs, like no one else. Click here.
I am long KREF, TRTX, CIO, and PK.